David Trainer discusses why legacy credit-rating agencies like S&P, Moody's, and Fitch rely on bad data and face conflicts of interest. The speakers explain how these agencies miss off-balance-sheet debt like operating leases, distorting credit metrics, and describe building their own ratings with cleaner data instead.
Chapters
So originally we outsourced our credit ratings. We relied on legacy providers like S&P Global, Fitch, and used them mostly to get a debt yield that was used in our WACC calculation. So for a long time, it really wasn't our expertise. It wasn't a focus of our plans. And it was just faster, simpler, and easier for us to do that. Now, we knew that outsourcing it came with accepting inferior products. At some point, we realized that the problems with legacy ratings were just too substantial for us to ignore. They're based on unscrubbed data. They don't go into the footnotes to the extent that we do. And one of the big things here also is that they have conflicts of interest that make it so that their ratings are not as objective as they should be.
We were using the third party for a while and we had to actually build in special logic in our weighted average cost of capital calculations to deal with ratings that made no sense. And prior to the financial crisis, it was really super clear to us that most of these ratings did not take into account the off-balance sheet debt from operating leases. It's phenomenal. This is what they do. They focus on debt, but they're not capturing this. And we would see companies When we adjusted for off-balance sheet debt, that would have debt-to-total capital ratios upwards of 90%, but with a AAA or AA rating. Eventually, we were forced to come up with our own credit rating. This article is where Moody's was fined for failing to disclose the conflicts of interest that drove that negligence. That negligence being the same negligence that equity investors or equity analysts have on Wall Street, which is if we don't give this company a good rating, we're going to lose business because that company won't sell stock. Or debt through us. Really massive conflict of interest. The Rolling Stone article, it's another exposé on the conflicts of interest that led to unreliable credit ratings. We're really happy to address that. It's not just that we've got better data. We're not conflicted. It's a big difference between what we do and they do. They have major conflicts of interest that have been proven to taint their ratings. We don't have any of that. Plus we got better data.
